What is an annuity and why should I have one?

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Planning your retirement isn’t an easy task. How much do you need to retire comfortably? Should you go with a simple IRA or a Roth IRA? What happens to your 401(k) when you leave your company? These questions and more can be addressed through a discussion with a qualified advisor. In the end, most will suggest you look for a tax-deferred option that will give you a stable income during your retirement years.

Annuities are becoming an increasingly popular option for those who are planning their retirement and looking for a way to have a stable income. In fact, annuity sales rose close to 10 percent in 2018, topping $218 billion according to the Insured Retirement Institute.

What exactly is an annuity?

An annuity is a form of insurance or investment entitling the investor to a series of annual amounts of money. It is funded via a series of fixed payments made over a set period of time, with the goal of providing consistent income at some point – in this case, once retirement begins. Payments typically come via one lump sum or in installments.

Annuities can either be fixed or variable.

  • Fixed Annuities: A fixed annuity pays guaranteed rates of interest, sometimes higher than bank CDs, CNN Money says. If you choose a deferred fixed annuity, your account will accumulate regular rates of interest. With an immediate fixed annuity, you’ll receive fixed payments once retired, as determined by your age and the size of your account.
  • Variable Annuities: These policies provide irregular payments that are based off how well their underlying assets (stock market, for example) are performing.

Should I make an annuity a part of my retirement plan?

Simply put, you’re going to receive regular payments and guaranteed returns with a fixed annuity. This is something that can’t be said about every retirement plan. Of course, you want to avoid high fees and, as is the case with any financial plan, you need to understand your opt-out and tax options. But, overall, an annuity should leave your investments untouched by market fluctuations that can occur with IRAs, mutual funds, bonds, and stocks.

What things should you consider?

  • Tax-deferred: You won’t owe taxes on the money until you start receiving payments. This is important because, in theory, your account should grow substantially from the time you started contributing funds until the time to withdraw them.
  • Regular payments and guaranteed funds: Those regular payments serve as a supplemental income for retirees. And a fixed annuity guarantees you’ll receive an already-established percentage of your principal investment.

How do I set up an annuity plan?

You can never start early enough when it comes to planning for your retirement. But, even if you started late and have the funds in another type of account, you may want to consider a fixed annuity. Limit your risk, balance your portfolio, and look to annuities to support a solid plan to enable a guaranteed return.

If you’re thinking about setting up an annuity, Peak American Financial will work with you to get an overall picture of your financial plan and investment options.

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